After last week, you may have noticed that I absolutely hate debt. I got myself into a lot of it, and it was a constant strain on my life. Paying off debt and watching that money come back into my own pocket at the end of the day instead of into my lender’s pocket is such an amazing feeling. What would you do with an extra $200, $500, or even $1000 per month if you didn’t have those monthly loan payments? How about you find out that answer instead of just dreaming!

Below we’ll discuss five different debt repayment strategies that will eventually get you to a debt free Nirvana. I’ll include the pros and cons of each strategy and give you my recommendation. Let’s kick it off with the “strategy” that is unfortunately used by many people just starting out.

1. Pay the Minimum

Pros:

• You will pay off your loans eventually
• You will barely avoid collections

Cons:

• You will pay the maximum amount of interest without getting into trouble
• Risk taking out more loans because the payments are so low
• It will take a long long time to pay off your loans in full

Pay at least the minimums on all of your loans! Do not trash your credit score. Do not get called by debt collectors. Do not declare bankruptcy. Pay your debts. If you do not pay your loans, you will never get rich young. There is no free lunch, so at least pay off the minimums. Paying only the minimums earns a grade of a “D”. It’s passing, but just barely. You can do better, and you deserve to do better, so keep reading.

Grade : D

2. Consolidation

Pros:

• One simple easy payment
• You will pay off your loans eventually
• You will barely avoid collections

Cons:

• May be more difficult to reinforce extra payments
• A higher overall interest rate or a longer term will be applied to your loans

There are a lot of people in the debt consolidation business. Why do you think this is? It’s because they stand to make a lot of money. They stand to make a lot of money OFF OF YOU! Many times, a debt consolidator will tell you that they can lower your interest rate and your monthly payment by bundling your loans together. It sounds too good to be true and it usually is. They are making their money by extending the term of your loans, meaning they’re adding on additional years to your loan.

You might be thinking that it doesn’t matter because you have a lower payment and a lower rate, but you’d be wrong. By extending the length of time your loans are outstanding, it will actually cost you more in interest by the end of the life of your loan. The consolidators that make their money this way are sneaky and do not deserve to be worked with.

There are honest consolidators out there who may buy your loans, but they will explain that they are just trying to simplify things for you. They will essentially bundle all of your outstanding loans into one new loan. You now will only have one payment that you have to pay off. If you’re somebody who needs simplicity, then this may be a decent option. Just make sure that you do the math and realize that you will pay for the convenience.

Grade : D

3. Debt Snowball

Pros:

• You will start seeing results quickly
• You will pay off your loans
• You will avoid collections

Cons:

• You may pay more interest than you need to overall

The debt snowball strategy is the strategy of lining up all of your debts in order of the smallest to the largest balance. Your job is to then pay the minimums on all of your loans except the smallest. You throw all of your extra payments at the smallest loan until it is gone. Once you pay off the smallest loan, you then go after the next smallest and so on until your payments are gone.

This is a great strategy for people who need help getting motivated because it is the fastest way to start seeing results. It is a fantastic feeling to watch a loan vanish from your life forever, and with this strategy, you’ll start seeing that quickly. The downside to the debt snowball strategy is that you may pay more in interest overall than necessary. If your smallest loans also have the lowest interest rates, then you’re leaving money on the table. All in all, the debt snowball method is a decent payment strategy, but it is not the best

Grade : B

4. Reverse Debt Snowball / Melting Snowball

Pros:

• Debt repayment will get easier as time goes on
• You will pay off your loans
• You will avoid collections

Cons:

• You may pay more interest than you need to overall

This strategy is exactly what it sounds like, it’s a backwards debt snowball. You line up your loans in order of the highest balance to the lowest balance. You throw all of your money at the highest balance loan until it is paid off. Once that loan is paid off, then you move onto the next highest until they are all gone.

This strategy is good for those people who start off strong, but need some reinforcement as time goes on. By the time this type of person may start getting tired of paying down loans, the loans will start dropping off faster and faster. The reverse snowball suffers from the same defect of the snowball method, you may end up paying more in interest than you need to. If your highest balance loans have the lower rates, then it will cost you more in the long run than if you follow our fifth and final step coming up next.

Grade : B

5. Debt Stacking / Debt Avalanche

Pros:

• You will pay off your loans the fastest
• You will pay the least amount of interest
• You will laugh when you hear the word collections because it doesn’t apply to you

Cons:

• It may be slightly more difficult or complicated than the other strategies

The Debt Stacking or Debt Avalanche strategy is my personal favorite. You will pay the least amount of interest overall and you will pay off your loans faster than any other strategy. Similar to the prior two methods, you will line up all of your loans. However, this time you are going to line then up from the highest to the lowest interest rate. You will then take all of your extra payments and apply them to the loan with the highest interest rate. Once that is gone, you’ll move on to the next highest interest rate, until they are all gone.

What’s the catch? Well that’s the great thing. There isn’t really a catch. It may not be as satisfying for those of us who need immediate satisfaction, and it may be frustrating for some people to jump from paying off a $1000 to a $4000 back to a $2000 loan. However, it really isn’t more complicated than the last two strategies, and that little extra willpower will get you one step closer to Getting Rich Young faster than any of the prior methods.

Grade : A

Conclusion:

If you aren’t serious about getting out of debt, then just pay the minimums

If you’re too lazy to spend 5 extra minutes to figure out which loans to pay off first, then consolidate

If you need fast gratification in order to build a habit, then go with the Debt Snowball

If you need help staying motivated in the late game, then go with the Reverse Debt Snowball / Melting Snowman

If you are serious about Getting Rich Young and want to get out of debt as fast as possible while paying the least interest, then go with the Debt Stacking / Debt Avalanche strategy.

Continue The Discussion:

What are you going to do once you have gotten yourself out of debt?